Credit may be a promising hunting ground: Aviva Investors

Despite the hopes of investors, Aviva Investors has warned that any early reversal of the recent growth slowdown is unlikely, although the renewed easing bias of major central banks, including our own Reserve Bank of Australia (RBA), which cut rates again last week, should provide some comfort.

This reflected the views of much of the industry, with the consensus generally being that while the market cycle turn could be pushed out by up to six months, it was likely unavoidable.

Further, the outlook for world growth had worsened over the last three months, with ongoing trade disputes hurting business sentiment and the slight easing of US-China tensions since the G20 summit improving but not resolving the issue.

According to Aviva Investors, global growth was likely to slow to around three per cent this year and next. As this was slightly below the estimated trend pace, the asset management firm said investors would see further easing of any demand strain on capacity limits and either lower or no rise in inflation in the next few years.

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The combination of these factors meant that the easing bias of the major banks was welcome, it said, predicting that a recession would be avoided for now but that the major risks, such as trade policy, were to the downside.

Aviva Investors recommended looking to credit for risk assets, specifically in emerging markets and high yield options, while keeping a modest preference to Government bonds for diversification. It also said that the US remained its preferred equity market, balanced by being underweight to emerging markets.

“As a house, our current equity allocation is neutral, favouring the US over emerging markets. We expect recession to be avoided, so a nasty default cycle is unlikely, and as a result credit should perform well,” the firm’s head of investment strategy and chief economist, Michael Grady, said.

“More dovish central bank action will help boost duration where we have a modest overweight, while the overall environment should be supportive for carry strategies. We expect the dollar to remain reasonably well supported.”